THE JM SMUCKER COMPANY (Dollars and shares in millions, unless otherwise noted, except per share data)
This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to provide an understanding of our results of operations, financial condition, and cash flows by focusing on changes in certain key measures from year-to-year, and should be read in conjunction with our consolidated financial statements and the accompanying notes presented in Item 8. "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed in Item 1A. "Risk Factors" of this Annual Report on Form 10-K. Company Background Each generation of consumers leaves their mark on culture by establishing new expectations for food and the companies that make it. Atthe J. M. Smucker Company , it is our privilege to be at the heart of this dynamic with a diverse portfolio that appeals to each generation of people and pets and is found in nearly 90 percent ofU.S. homes and countless restaurants, including iconic brands consumers have always loved such as Folgers, Jif, and Milk-Bone and new favorites like Café Bustelo, Smucker's Uncrustables, and Rachael Ray Nutrish. By continuing to immerse ourselves in consumer preferences and acting responsibly, we will continue growing our business and the positive impact we have on society. We have three reportable segments:U.S. Retail Pet Foods ,U.S. Retail Coffee, andU.S. Retail Consumer Foods . TheU.S. retail market segments in total comprised 87 percent of net sales in 2022 and represent a major portion of our strategic focus - the sale of branded food and beverage products with leadership positions to consumers through retail outlets inNorth America . In theU.S. retail market segments, our products are primarily sold to food retailers, club stores, discount and dollar stores, online retailers, pet specialty stores, natural foods stores and distributors, drug stores, military commissaries, and mass merchandisers. International and Away From Home includes the sale of products distributed domestically and in foreign countries through retail channels and foodservice distributors and operators (e.g., health care operators, restaurants, lodging, hospitality, offices, K-12, colleges and universities, and convenience stores). Strategic Overview We remain rooted in our Basic Beliefs of Quality, People, Ethics, Growth, and Independence established by our founder and namesake,Jerome Smucker , more than a century ago. Today, these Basic Beliefs are the core of our unique corporate culture and serve as a foundation for decision-making and actions. We have been led by five generations of family leadership, having had only six chief executive officers in 125 years. This continuity of management and thought extends to the broader leadership team that embodies the values and embraces the business practices that have contributed to our consistent growth. Our strategic vision is to engage, delight, and inspire consumers by building brands they love and leading in growing categories. This vision is our long-term direction that guides business priorities and aligns our organization. We will continue to drive balanced, long-term growth by advancing on the following executional priorities:
•Drive Commercial Excellence | Deliver best-in-class go-to-market execution and commercial delivery;
•Streamline our Cost Infrastructure | Focus on profitability and cost discipline;
•Reshape our Portfolio | Optimize our portfolio to meet the evolving needs of consumers; and
•Unleash our Organization to Win | Inspire, enable, and empower our employees while improving diversity at every level.
Our strategic growth objectives include net sales increasing by a low-single
digit percentage and operating income excluding non-GAAP adjustments ("adjusted
operating income") increasing by a mid-single digit percentage on average over
the long-term. Related to income per diluted share excluding non-GAAP
adjustments ("adjusted earnings per share"), our strategic growth objective is
to increase by a high-single digit percentage over the long-term. We expect
organic growth, including new products, to drive much of our top-line growth,
while the contribution from acquisitions will vary from year to year. Our
non-GAAP adjustments include amortization expense and impairment charges related
to intangible assets, certain divestiture, acquisition, integration, and
restructuring costs ("special project costs"), gains and losses on divestitures,
the net change in cumulative unallocated gains and losses on commodity and
foreign currency exchange derivative activities ("change in net cumulative
unallocated derivative gains and losses"), and other one-time items that do not
directly reflect ongoing operating
25
--------------------------------------------------------------------------------
results. Refer to "Non-GAAP Financial Measures" in this discussion and analysis
for additional information. Due to the unknown and potentially prolonged impact
of COVID-19, as well as the challenged supply network and increased labor
shortages, we may experience difficulties or be delayed in achieving our
long-term strategies; however, we continue to evaluate the effects on our
long-term growth objectives.
Over the past five years, net sales and adjusted earnings per share increased at
a compound annual growth rate of 2 percent and 3 percent, respectively, while
adjusted operating income decreased at a rate of 1 percent. These changes were
primarily driven by increased at-home consumption for the U.S. Retail Coffee and
U.S. Retail Consumer Foods segments and the Ainsworth acquisition in 2019,
partially offset by the reduction in net sales from the divestitures of the
private label dry pet food and natural beverage and grains businesses in 2022,
Crisco and Natural Balance businesses in 2021, and the U.S. baking business in
2019. Net cash provided by operating activities has increased at a compound
annual growth rate of 1 percent over the past five years. Our cash deployment
strategy is to balance reinvesting in our business through acquisitions and
capital expenditures with returning cash to our shareholders through the payment
of dividends and share repurchases. Our deployment strategy also includes a
significant focus on debt repayment.
Divestitures
OnJanuary 31, 2022 , we sold the natural beverage and grains businesses to Nexus. The transaction included products sold under the R.W. Knudsen and TruRoots brands, inclusive of certain trademarks, a licensing agreement for Santa Cruz Organic beverages, dedicated manufacturing and distribution facilities inChico, California , andHavre de Grace, Maryland , and approximately 150 employees who supported the natural beverage and grains businesses. The transaction did not include Santa Cruz Organic nut butters, fruit spreads, syrups, or applesauce. Under our ownership, the businesses generated net sales of$106.7 and$143.4 in 2022 and 2021, respectively, primarily included in theU.S. Retail Consumer Foods segment. Net proceeds from the divestiture were$97.1 , which were inclusive of a preliminary working capital adjustment and cash transaction costs, and will be finalized during the first quarter of 2023. Upon completion of this transaction, we recognized a pre-tax gain of$26.7 during 2022, which was included in other operating expense (income) - net within the Statement of Consolidated Income. OnDecember 1, 2021 , we sold the private label dry pet food business toDiamond Pet Foods . The transaction included dry pet food products sold under private label brands, a dedicated manufacturing facility located in Frontenac,Kansas , and approximately 220 employees who supported the private label dry pet food business. The transaction did not include any branded products or our private label wet pet food business. Under our ownership, the business generated net sales of$62.3 and$94.0 in 2022 and 2021, respectively, included in theU.S. Retail Pet Foods segment. Final net proceeds from the divestiture were$32.9 , which were net of cash transaction costs. Upon completion of this transaction, we recognized a pre-tax loss of$17.1 during 2022, which was included in other operating expense (income) - net within the Statement of Consolidated Income. OnJanuary 29, 2021 , we sold the Natural Balance premium pet food business to Nexus. The transaction included pet food products sold under the Natural Balance brand, certain trademarks and licensing agreements, and select employees who supported the Natural Balance business. Under our ownership, the business generated net sales of$156.7 in 2021, included in theU.S. Retail Pet Foods segment. Final net proceeds from the divestiture were$33.8 , which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax loss of$89.5 during 2021, which was included in other operating expense (income) - net within the Statement of Consolidated Income. OnDecember 1, 2020 , we sold the Crisco oils and shortening business to B&G Foods. The transaction included oils and shortening products sold under the Crisco brand, primarily in theU.S. andCanada , certain trademarks and licensing agreements, dedicated manufacturing and warehouse facilities located inCincinnati, Ohio , and approximately 160 employees who supported the Crisco business. Under our ownership, the business generated net sales of$198.9 in 2021, primarily included in theU.S. Retail Consumer Foods segment. Final net proceeds from the divestiture were$530.2 , which were net of cash transaction costs and included a working capital adjustment. Upon completion of the transaction, we recognized a pre-tax gain of$114.8 during 2021, which was included in other operating expense (income) - net within the Statement of Consolidated Income. 26 --------------------------------------------------------------------------------
COVID-19
The spread of COVID-19 throughout
During calendar year 2021, state governments reopened their economies, while adhering to new guidelines and enhanced safety measures, such as social distancing, face mask protocols, and vaccination requirements. However, there was a significant number ofU.S. cases in late calendar year 2021 and early calendar year 2022, and as a result, consumers stayed at home more frequently as a precaution, causing the demand related to at-home food consumption to remain elevated, though the impact is of a lesser extent as compared to the prior year. While we continue to benefit from elevated consumption, the supply chain network remains challenged due to the increased demand and supply pressures, as well as COVID-19 cases and increasing labor shortages, which continue to negatively impact our business and overall industry. We anticipate this consumer behavior and at-home food consumption may continue, to some extent, through calendar year 2022, dependent on government guidance regarding risk mitigation measures, vaccination rates and effectiveness, and the impact of additional COVID-19 variants. InSeptember 2021 , theU.S. President issued an executive order applicable to federal contractors and employers with 100 or more employees. As a result, we announced a vaccination mandate that required all employees to be vaccinated or have received an approved medical or religious exemption as early asDecember 2021 , and no later thanMarch 2022 , dependent upon location. We fully implemented the mandate for salaried employees inDecember 2021 , prior to theU.S. Supreme Court's ruling inJanuary 2022 to block the federal mandate. However, we lifted the mandate that required hourly employees to be vaccinated byMarch 2022 to support business continuity across our operations. Furthermore, we have reopened our corporate headquarters inOrrville, Ohio , with appropriate safety protocols, and as a result, occupancy levels have gradually increased during 2022 while our office-based employees transition to a hybrid work schedule. We continue to monitor the latest public health and government guidance related to COVID-19 and will adjust our approach and safety protocols, as needed. We have crisis management teams at all our facilities, which continue to monitor their respective locations and implement additional risk mitigation actions, as necessary. All our production operations remain open, and none have experienced significant disruptions or labor reductions related to COVID-19. During 2022, we experienced increased disruption in our supply chain network, including the supply of certain ingredients, packaging, and other sourced materials, which has resulted in higher than expected inflation, including escalating transportation and other supply chain costs. We expect that these inflationary cost increases will continue, but we expect they will be partially mitigated by pricing actions implemented in 2022 and those that we plan to implement in 2023. It is possible that more significant disruptions could occur if the COVID-19 pandemic continues to impact markets around the world, including the impact of e-commerce pressures on freight charges and potential shipping delays due to supply and demand imbalances, as well as labor shortages. We also continue to work closely with our customers and external business partners, taking additional actions to ensure safety and business continuity, and maximize product availability. We have maintained production at all our facilities and availability of appointments at distribution centers. Furthermore, we have implemented measures to manage order volumes to ensure a consistent supply across our retail partners during this period of high demand. However, to the extent that high demand levels or the current supply chain environment continues to disrupt order fulfillment, we may experience volume loss and elevated penalties. During 2022, customer order levels remain elevated, primarily across ourU.S. Retail Consumer Foods andU.S. Retail Coffee segments, in response to the increased consumer demand for our products related to the elevated at-home consumption. Further, as states have reopened their economies during 2022, our net sales for the away from home channels have continued to improve compared to the initial months of the pandemic. This trend could moderate during the remainder of calendar year 2022 if cases rise and governments impose additional safety measures that further impact away from home consumption, which is partially dependent upon vaccination rates and effectiveness, as well as the impact of additional COVID-19 variants. Overall, the impact of COVID-19 remains uncertain and ultimately depends on the length and severity of the pandemic, inclusive of the introduction of new strains of the virus; the federal, state, and local government actions taken in response; vaccination rates and effectiveness; the impact of vaccination requirements; and the macroeconomic environment. We will continue to evaluate the nature and extent to which COVID-19 will impact our business, supply chain, including labor availability and attrition, consolidated results of operations, financial condition, and liquidity. 27 -------------------------------------------------------------------------------- Results of Operations This discussion and analysis deals with comparisons of material changes in the consolidated financial statements for the years endedApril 30, 2022 and 2021. For the comparisons of the years endedApril 30, 2021 and 2020, see the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our 2021 Annual Report on Form 10-K. Year Ended April 30, % Increase 2022 2021 (Decrease) Net sales$ 7,998.9 $ 8,002.7 - % Gross profit$ 2,700.7 $ 3,138.7 (14) % of net sales 33.8 % 39.2 % Operating income$ 1,023.8 $ 1,386.8 (26) % of net sales 12.8 % 17.3 % Net income: Net income$ 631.7 $ 876.3 (28)
Net income per common share - assuming dilution
(25)
Adjusted gross profit (A) $ 2,744.6 $ 3,048.5 (10)
% of net sales 34.3 % 38.1 %
Adjusted operating income (A)$ 1,440.1 $ 1,528.8 (6) % of net sales 18.0 % 19.1 % Adjusted income: (A) Income$ 962.2 $ 1,025.0 (6) Earnings per share - assuming dilution$ 8.88 $ 9.12 (3)
(A)We use non-GAAP financial measures to evaluate our performance. Refer to "Non-GAAP Financial Measures" in this discussion and analysis for a reconciliation to the comparable generally accepted accounting principles ("GAAP") financial measure.
Net Sales Year Ended April 30, Increase 2022 2021 (Decrease) % Net sales$ 7,998.9 $ 8,002.7 $ (3.8) - % Crisco divestiture - (198.9) 198.9 2 Natural Balance divestiture - (156.7) 156.7 2 Private label dry pet food divestiture - (40.7) 40.7 1 Natural beverage and grains divestiture - (35.5) 35.5 - Foreign currency exchange (17.1) - (17.1) -
Net sales excluding divestitures and foreign currency exchange (A)
$ 7,981.8 $ 7,570.9 $ 410.9 5 %
Amounts may not add due to rounding.
(A)Net sales excluding divestitures and foreign currency exchange is a non-GAAP financial measure used to evaluate performance internally. This measure provides useful information to investors because it enables comparison of results on a year-over-year basis. Net sales in 2022 was comparable to the prior year, which includes$431.8 of noncomparable net sales in the prior year related to divestitures. Net sales excluding divestitures and foreign currency exchange increased$410.9 , or 5 percent, which was primarily due to higher net price realization across each of ourU.S. Retail segments and for International and Away From Home, reflecting list price increases during 2022. 28 -------------------------------------------------------------------------------- Operating Income The following table presents the components of operating income as a percentage of net sales.
Year Ended
2022 2021
Gross profit 33.8 % 39.2 %
Selling, distribution, and administrative expenses:
Marketing 3.5 % 3.9 %
Advertising 2.2 2.8
Selling 2.8 3.0
Distribution 3.6 3.4
General and administrative 5.0 5.9
Total selling, distribution, and administrative expenses 17.0 % 19.0 %
Amortization 2.8 2.9
Other intangible assets impairment charges 1.9 -
Other special project costs 0.1 0.3
Other operating expense (income) - net (0.8) (0.4)
Operating income 12.8 % 17.3 %
Amounts may not add due to rounding.
Gross profit decreased
Operating income decreased$363.0 , or 26 percent, primarily reflecting the decrease in gross profit and a$150.4 intangible asset impairment charge in 2022 related to the Rachael Ray Nutrish brand, partially offset by a$162.8 decrease in selling, distribution, and administrative ("SD&A") expenses, primarily driven by lower marketing spend and incentive compensation expense. Further offsetting the decrease in operating income is a$36.7 increase in net other operating income, primarily reflecting an anticipated insurance recovery of$49.8 , net of the deductible, related to the Jif peanut butter recall that mostly offsets the unfavorable impact of unsaleable inventory, estimated customer returns, and consumer refunds, as discussed in Note 15: Contingencies. Our non-GAAP adjustments include amortization expense and impairment charges related to intangible assets, special project costs, gains and losses on divestitures, the change in net cumulative unallocated derivative gains and losses, and other one-time items that do not directly reflect ongoing operating results. Refer to "Non-GAAP Financial Measures" in this discussion and analysis for additional information. Gross profit excluding non-GAAP adjustments ("adjusted gross profit") decreased$303.9 , or 10 percent, in 2022, reflecting the exclusion of the change in net cumulative unallocated derivative gains and losses and special project costs, as compared to GAAP gross profit. Adjusted operating income decreased$88.7 , or 6 percent, as compared to the prior year, further reflecting the exclusion of the impairment charge and net pre-tax gain on divestitures. Interest Expense Net interest expense decreased$16.2 , or 9 percent, in 2022, primarily as a result of reduced debt outstanding as compared to the prior year. For additional information, see "Capital Resources" in this discussion and analysis. Income Taxes Income taxes decreased$83.5 , or 28 percent, in 2022, as compared to the prior year. The effective income tax rate of 25.1 percent for 2022 varied from theU.S. statutory income tax rate of 21.0 percent primarily due to state income taxes, including an unfavorable one-time deferred tax impact of an internal legal entity simplification in the third quarter of 2022 to support multiple work locations for office-based employees and our continued strategic activities. The effective income tax rate of 25.2 percent for 2021 varied from theU.S. statutory income tax rate of 21.0 percent primarily due to the impact of state income taxes, as well as additional net income tax expense related to the divestitures of the Crisco and Natural Balance businesses. We anticipate a full-year effective income tax rate for 2023 to be approximately 24.2 percent. For additional information, refer to Note 13: Income Taxes. 29 -------------------------------------------------------------------------------- Restructuring Activities A restructuring program was approved by the Board during 2021, associated with opportunities identified to reduce our overall cost structure, optimize our organizational design, and support our portfolio reshape. This is inclusive of certain restructuring costs associated with the divestitures of the Crisco, Natural Balance, private label dry pet food, and natural beverage and grains businesses. For additional information related to the divestitures, see Note 3: Divestitures. During 2021, we substantially completed an organizational redesign related to our corporate headquarters and announced plans to close ourSuffolk, Virginia , facility as a result of a new strategic partnership for the production of our liquid coffee products. During 2022, we completed the transition of production toJDE Peet's , as anticipated. Furthermore, the restructuring program was expanded during the third quarter of 2022 to include certain costs associated with the recent divestitures of the private label dry pet food and natural beverage and grains businesses, as well as the recently announced plans to close ourRipon, Wisconsin , production facility by the end of calendar year 2022 to further optimize operations for ourConsumer Foods business. We expect to incur costs of approximately$70.0 associated with the restructuring activities planned to date. More than half of these costs are expected to be other transition and termination costs associated with our cost reduction and margin management initiatives, inclusive of accelerated depreciation, while the remainder represents employee-related costs. We anticipate the planned activities associated with this restructuring program will be completed by the end of 2023, with the majority of the costs expected to be incurred in the first half of 2023. We have incurred total cumulative restructuring costs of$52.6 , of which$28.5 and$24.1 were incurred during 2022 and 2021, respectively. For further information, refer to Note 2: Integration and Restructuring Costs. Commodities Overview The raw materials we use in each of our segments are primarily commodities, agricultural-based products, and packaging materials. The most significant of these materials, based on 2022 annual spend, are green coffee, peanuts, protein meals, grains, and plastic containers. Green coffee, corn, certain meals, oils, and grains are traded on active regulated exchanges, and the price of these commodities fluctuates based on market conditions. Derivative instruments, including futures and options, are used to minimize the impact of price volatility for these commodities. We source green coffee from more than 20 coffee-producing countries. Its price is subject to high volatility due to factors such as weather, global supply and demand, plant disease, investor speculation, and political and economic conditions in the source countries. We source peanuts, protein meals, and oils and fats mainly fromNorth America . We are one of the largest procurers of peanuts in theU.S. and frequently enter into long-term purchase contracts for various periods of time to mitigate the risk of a shortage of this commodity. The oils we purchase are mainly peanut and soybean. The price of peanuts, protein meals, and oils are driven primarily by weather, which impacts crop sizes and yield, as well as global demand, especially from large importing countries such asChina andIndia . In particular, the supply chain for protein meals, fats, corn products, and green coffee has been significantly disrupted by the COVID-19 pandemic, and therefore, the price for these commodities has increased and may continue to increase due to such disruptions. Furthermore, the price of grains and oils and fat-based products has been impacted by the recent conflict betweenRussia andUkraine . We frequently enter into long-term contracts to purchase plastic containers, which are sourced mainly from within theU.S. Plastic resin is made from petrochemical feedstock and natural gas feedstock, and the price can be influenced by feedstock, energy, and crude oil prices as well as global economic and geopolitical conditions.
Excluding the impact of derivative gains and losses, our overall commodity costs in 2022 were higher than in 2021, primarily due to higher costs for green coffee, protein meals, oils and fats, and grains.
30
--------------------------------------------------------------------------------
Segment Results
We have three reportable segments: U.S. Retail Pet Foods , U.S. Retail Coffee,
and U.S. Retail Consumer Foods . The presentation of International and Away From
Home represents a combination of all other operating segments that are not
individually reportable.
The U.S. Retail Pet Foods segment primarily includes the domestic sales of
Rachael Ray Nutrish, Meow Mix, Milk-Bone, 9Lives, Kibbles 'n Bits, Pup-Peroni,
and Nature's Recipe branded products; the U.S. Retail Coffee segment primarily
includes the domestic sales of Folgers, Dunkin', and Café Bustelo branded
coffee; and the U.S. Retail Consumer Foods segment primarily includes the
domestic sales of Smucker's and Jif branded products. International and Away
From Home includes the sale of products distributed domestically and in foreign
countries through retail channels and foodservice distributors and operators
(e.g., health care operators, restaurants, lodging, hospitality, offices, K-12,
colleges and universities, and convenience stores).
Year Ended April 30,
2022 2021 % Increase (Decrease)
Net sales:
U.S. Retail Pet Foods $ 2,764.3 $ 2,844.5 (3) %
U.S. Retail Coffee 2,497.3 2,374.6 5
U.S. Retail Consumer Foods 1,707.2 1,835.7 (7)
International and Away From Home 1,030.1 947.9 9
Segment profit:
U.S. Retail Pet Foods $ 395.9 $ 487.0 (19) %
U.S. Retail Coffee 736.7 769.1 (4)
U.S. Retail Consumer Foods 424.2 472.5 (10)
International and Away From Home 142.0 124.1 14
Segment profit margin:
U.S. Retail Pet Foods 14.3 % 17.1 %
U.S. Retail Coffee 29.5 32.4
U.S. Retail Consumer Foods 24.8 25.7
International and Away From Home 13.8 13.1
The U.S. Retail Pet Foods segment net sales decreased$80.2 in 2022, inclusive of the impact of$197.4 of noncomparable net sales in the prior year related to the divested Natural Balance and private label dry pet food businesses. Excluding the noncomparable impact of the divested businesses, net sales increased$117.2 , or 4 percent. Higher net price realization across the portfolio increased net sales by 5 percentage points, primarily reflecting list price increases across the portfolio, partially offset by increased trade spend. Unfavorable volume/mix decreased net sales by 1 percentage point, primarily driven by declines for dog food, partially offset by growth for cat food and dog snacks. Segment profit decreased$91.1 , primarily reflecting higher commodity and ingredient, transportation, and manufacturing costs and the unfavorable volume/mix, partially offset by the higher net pricing and lower marketing expense.
TheU.S. Retail Coffee segment net sales increased$122.7 in 2022. Net price realization contributed 6 percentage points to net sales, primarily reflecting list price increases across the portfolio. Unfavorable volume/mix decreased net sales by 1 percentage point, primarily driven by the Folgers brand, partially offset by the Dunkin' and Café Bustelo brands. Segment profit decreased$32.4 , reflecting higher commodity costs and the unfavorable volume/mix, partially offset by higher net pricing. 31 --------------------------------------------------------------------------------
The U.S. Retail Consumer Foods segment net sales decreased$128.5 in 2022, inclusive of the impact of$211.8 of noncomparable net sales in the prior year related to the divested Crisco and natural beverage and grains businesses. Excluding the noncomparable impact of the divested businesses, net sales increased$83.3 , or 5 percent. Higher net price realization contributed 4 percentage points to net sales, primarily driven by Smucker's Uncrustables frozen sandwiches and Smucker's fruit spreads, including the unfavorable impact of estimated customer returns related to the Jif peanut butter recall. Volume/mix increased net sales by 1 percentage point, reflecting increases for Smucker's Uncrustables frozen sandwiches and Jif peanut butter, partially offset by a decline for Smucker's fruit spreads. Segment profit decreased$48.3 , reflecting the noncomparable segment profit in the prior year related to the divested businesses. Comparable segment profit growth from the higher net pricing, lower marketing spend, and favorable volume/mix was partially offset by higher commodity and ingredient, manufacturing, packaging, and transportation costs. Segment profit also reflects the unfavorable impact of unsaleable inventory and estimated customer returns, as well as other associated costs related to the Jif peanut butter recall, which were mostly offset by the anticipated insurance recovery, net of the deductible.
International and Away From Home
International and Away From Home net sales increased$82.2 in 2022, including the noncomparable impact of$22.6 of net sales in the prior year related to the divested Crisco and natural beverage and grains businesses. Excluding the noncomparable impact of the divested businesses and foreign currency exchange, net sales increased$87.7 , or 9 percent, primarily reflecting a 23 percent increase for the Away From Home operating segment, partially offset by a 2 percent decrease for the International operating segment. Favorable volume/mix for the combined businesses contributed 6 percentage points to net sales, primarily driven by increases for portion control and coffee products in the away from home channels, partially offset by a decrease for baking mixes and ingredients in the International operating segment. Net price realization contributed a 3 percentage point increase to net sales for the combined businesses, primarily driven by increases for coffee products in the away from home channels and fruit spread products in the International operating segment. Segment profit increased$17.9 , primarily reflecting higher net pricing, favorable volume/mix, and the favorable foreign currency exchange impact, partially offset by increased commodity costs and the noncomparable segment profit in the prior year related to the divested businesses.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our principal source of funds is cash generated from operations, supplemented by borrowings against our commercial paper program and revolving credit facility. Total cash and cash equivalents decreased to$169.9 atApril 30, 2022 , compared to$334.3 atApril 30, 2021 .
The following table presents selected cash flow information.
Year Ended April 30,
2022 2021
Net cash provided by (used for) operating activities$ 1,136.3 $ 1,565.0 Net cash provided by (used for) investing activities (355.5) 311.1 Net cash provided by (used for) financing activities (944.5) (1,943.9)
Net cash provided by (used for) operating activities
(417.5) (306.7)
Free cash flow (A) $ 718.8 $ 1,258.3 (A)Free cash flow is a non-GAAP financial measure used by management to evaluate the amount of cash available for debt repayment, dividend distribution, acquisition opportunities, share repurchases, and other corporate purposes.
The$428.7 decrease in cash provided by operating activities in 2022 was primarily driven by greater working capital requirements in 2022, as well as lower net income adjusted for noncash items in the current year. The increase in cash required to fund working capital, as compared to the prior year, was primarily attributable to timing of payments for accounts payable, changes in accrued incentive compensation and marketing, and an increase in inventory levels compared to the prior year, primarily driven by the recent input cost inflation. 32 -------------------------------------------------------------------------------- Cash used for investing activities in 2022 consisted primarily of$417.5 in capital expenditures, primarily driven by investments in Smucker's Uncrustables frozen sandwiches to support the new manufacturing and distribution facilities inMcCalla, Alabama , and capacity expansion inLongmont, Colorado , as well as plant maintenance across our facilities. An increase of$65.4 in our derivative cash margin account balances also contributed to the use of cash in 2022. These decreases were partially offset by net proceeds received from the divested private label dry pet food and natural beverage and grains businesses of$130.0 . Cash provided by investing activities in 2021 primarily consisted of net proceeds received from the divestitures of the Crisco and Natural Balance businesses of$564.0 and a decrease of$54.0 in our derivative cash margin account balances, partially offset by$306.7 in capital expenditures, which primarily reflected capacity expansion at ourLongmont facility, as well as plant maintenance across our facilities. Cash used for financing activities in 2022 consisted primarily of long-term debt repayments of$1,157.0 , dividend payments of$418.1 , and purchase of treasury shares of$270.4 , partially offset by$797.6 in long-term debt proceeds and a net increase in short-term borrowings of$97.6 . Cash used for financing activities in 2021 consisted primarily of long-term debt repayments of$700.0 , purchase of treasury shares of$678.4 , dividend payments of$403.2 , and net short-term debt repayments of$166.4 . Supplier Financing Program As part of ongoing efforts to maximize working capital, we work with our suppliers to optimize our terms and conditions, which includes the extension of payment terms. Payment terms with our suppliers, which we deem to be commercially reasonable, range from 0 to 180 days. During 2020, we entered into an agreement with a third-party administrator to provide an accounts payable tracking system and facilitate a supplier financing program, which allows participating suppliers the ability to monitor and voluntarily elect to sell our payment obligations to a designated third-party financial institution. Participating suppliers can sell one or more of our payment obligations at their sole discretion, and our rights and obligations to our suppliers are not impacted. We have no economic interest in a supplier's decision to enter into these agreements. Our rights and obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers' decisions to sell amounts under these arrangements. As ofApril 30, 2022 and 2021,$314.3 and$304.2 of our outstanding payment obligations, respectively, were elected and sold to a financial institution by participating suppliers. During 2022 and 2021, we paid$1,042.9 and$663.5 , respectively, to a financial institution for payment obligations that were settled through the supplier financing program.
Contingencies
We, like other food manufacturers, are from time to time subject to various administrative, regulatory, and other legal proceedings arising in the ordinary course of business. We are currently a defendant in a variety of such legal proceedings, including certain lawsuits related to the alleged price-fixing of shelf stable tuna products prior to 2011 by a business previously owned by, but divested prior to our acquisition of, Big Heart, the significant majority of which were settled and paid during 2019 and 2020. While we cannot predict with certainty the ultimate results of these proceedings or potential settlements associated with these or other matters, we have accrued losses for certain contingent liabilities that we have determined are probable and reasonably estimable atApril 30, 2022 . Based on the information known to date, with the exception of the matters discussed below, we do not believe the final outcome of these proceedings would have a material adverse effect on our financial position, results of operations, or cash flows. In addition to the legal proceedings discussed above, we are currently a defendant inCouncil for Education and Research on Toxics ("CERT") v.Brad Barry LLC , et al., which alleges that we, in addition to nearly eighty other defendants (collectively the "Defendants") who manufacture, package, distribute, or sell packaged coffee, failed to provide warnings for our coffee products of exposure to the chemical acrylamide as required under Proposition 65. CERT sought equitable relief, including warnings to consumers, as well as civil penalties in the amount of the statutory maximum of$2,500 per day per violation of Proposition 65. In addition, CERT asserted that every consumed cup of coffee, absent a compliant warning, was equivalent to a violation under Proposition 65. InJune 2019 , the state agency responsible for administering the Proposition 65 program, theCalifornia Office of Environmental Health Hazard Assessment ("OEHHA"), approved a regulation clarifying that cancer warnings are not required for coffee under Proposition 65, and inAugust 2020 , the trial court granted the Defendants' motion for summary judgment based on the regulation. CERT appealed the ruling inNovember 2020 to theCalifornia Court of Appeals for the Second Appellate District , which is currently pending. We are also defendants in a series of putative class action lawsuits that were originally filed in federal courts inCalifornia ,Florida ,Illinois ,Missouri ,New York, Texas ,Washington , andWashington D.C. but have been transferred to theUnited States District Court for the Western District of Missouri for coordinated pre-trial proceedings. The plaintiffs assert claims arising under various state laws for false advertising, consumer protection, deceptive and unfair trade practices, and similar 33 -------------------------------------------------------------------------------- statutes. Their claims are premised on allegations that we have misrepresented the number of servings that can be made from various canisters of Folgers coffee on the packaging for those products. The outcome and the financial impact of these cases, if any, cannot be predicted at this time. Accordingly, no loss contingency has been recorded for these matters as ofApril 30, 2022 , and the likelihood of loss is not considered probable or estimable. However, if we are required to pay significant damages, our business and financial results could be adversely impacted, and sales of those products could suffer not only in these locations but elsewhere. For additional information, see Note 15: Contingencies. Product Recall Subsequent toApril 30, 2022 , we initiated a voluntary recall of select Jif peanut butter products produced at ourLexington, Kentucky , facility and sold primarily in theU.S. , due to potential salmonella contamination. At that time, we also suspended the manufacturing of Jif peanut butter products at theLexington facility. No other products produced at our other facilities were affected by this recall. As a result, and in accordance withU.S. GAAP, we recorded reserves of$52.3 in our consolidated financial statements as ofApril 30, 2022 , within ourU.S. Retail Consumer Foods segment, which was inclusive of unsaleable inventory as ofApril 30, 2022 , as well as estimated customer returns and consumer refunds related to net sales in 2022. We anticipate these costs will be recovered by insurance, and as a result, an insurance receivable of$49.8 , net of the deductible, was also recorded as ofApril 30, 2022 . OnJune 10, 2022 , we announced our plans to resume manufacturing Jif peanut butter products at ourLexington facility. Further, ourMemphis, Tennessee , facility was not affected by the recall and has continued to manufacture Jif peanut butter products. However, we temporarily paused shipments from theMemphis facility to eliminate confusion while customers cleared their shelves of potentially impacted products manufactured at theLexington facility. We will resume shipping from both theLexington andMemphis facilities and are partnering with retailers to restock Jif peanut butter products as soon as possible. Based on progress to date, we believe this matter will be substantially resolved during the first quarter of 2023. Based on our best estimates, we anticipate an unfavorable pre-tax impact of approximately$125.0 in 2023, net of the remaining anticipated insurance recoveries, primarily related to the estimated impact of manufacturing downtime, customer returns and penalties, and unsaleable inventory, as well as other recall related costs. The recall will primarily impact ourU.S. Retail Consumer Foods segment. Our ultimate loss from the Jif peanut butter recall could differ materially from these estimates, primarily dependent upon the magnitude of lost sales resulting from the unavailability of products for a longer period of time than anticipated, as well as any resulting adverse consumer reaction, including the loss of perceived value and any shift in consumer preferences. Capital Resources The following table presents our capital structure.April 30, 2022 2021
Current portion of long-term debt $ -
180.0 82.0
Long-term debt, less current portion 4,310.6 3,516.8
Total debt $ 4,490.6 $ 4,751.7
Shareholders' equity 8,140.1 8,124.8
Total capital $ 12,630.7 $ 12,876.5
During the second quarter of 2022, we completed an offering of $800.0 in Senior
Notes due March 15, 2032 , and September 15, 2041 . The Senior Notes included $7.2
of capitalized debt issuance costs and $2.4 of offering discounts, and which are
amortized to interest expense over the life of the debt. The net proceeds from
the offering were primarily used to repay $750.0 in principal of the Senior
Notes due October 15, 2021 . Furthermore, during the first quarter of 2022, we
prepaid $400.0 in principal of the Senior Notes due March 15, 2022 , and as a
result, we recognized a net loss on extinguishment of $6.9 , which primarily
consisted of a make-whole payment and was included in other income (expense) -
net in the Statement of Consolidated Income.
We have available a $2.0 billion unsecured revolving credit facility with a
group of 11 banks that matures in August 2026 . Additionally, we participate in a
commercial paper program under which we can issue short-term, unsecured
commercial paper not to exceed $2.0 billion at any time. The commercial paper
program is backed by our revolving credit facility and reduces what we can
borrow under the revolving credit facility by the amount of commercial paper
outstanding. Commercial
34
--------------------------------------------------------------------------------
paper is used as a continuing source of short-term financing for general
corporate purposes. As of April 30, 2022 , we had $180.0 of short-term borrowings
outstanding, all of which were issued under our commercial paper program, at a
weighted-average interest rate of 0.65 percent.
We are in compliance with all our debt covenants as of April 30, 2022 , and
expect to be for the next 12 months. For additional information on our long-term
debt, sources of liquidity, and debt covenants, see Note 7: Debt and Financing
Arrangements.
During 2022, we repurchased 2.0 million common shares under a repurchase plan
authorized by the Board for $262.5 . At April 30, 2022 , approximately 5.8 million
common shares remain available for repurchase pursuant to the Board's
authorizations. There is no guarantee as to the exact number of shares that may
be repurchased or when such purchases may occur. During 2021, we repurchased 5.8
million common shares under a repurchase plan authorized by the Board for
$671.9 .
In November 2021 , we announced plans to invest $1.1 billion to build a new
manufacturing facility and distribution center in McCalla, Alabama , dedicated to
production of Smucker's Uncrustables frozen sandwiches. Construction of this
facility began in the third quarter of 2022, with production expected to begin
in calendar year 2025. The project demonstrates our commitment to meet
increasing demand for this highly successful product and deliver on our strategy
to focus on brands with the most significant growth opportunities. Construction
of the facility and production will occur in three phases over multiple years
and will result in the creation of up to 750 jobs. Financial investments and job
creation will align with each of the three phases.
The following table presents certain cash requirements related to 2023 investing
and financing activities based on our current expectations. Although no
principal payments are required on our debt obligations in 2023, we may utilize
a portion of our cash for debt repayment.
Projection
Year Ending
April 30, 2023
Dividend payments - based on current rates and common shares outstanding $ 421.6
Capital expenditures 550.0
Interest payments 147.2
Absent any material acquisitions or other significant investments, we believe
that cash on hand, combined with cash provided by operations, borrowings
available under our revolving credit facility and commercial paper program, and
access to capital markets, will be sufficient to meet our cash requirements for
the next 12 months, including the payment of quarterly dividends, principal and
interest payments on debt outstanding, and capital expenditures. However, as a
result of the current economic environment, we may experience an increase in the
cost or the difficulty to obtain debt or equity financing, or to refinance our
debt in the future. We continue to evaluate these risks, which could affect our
financial condition or our ability to fund operations or future investment
opportunities.
As of April 30, 2022 , total cash and cash equivalents of $46.2 was held by our
foreign subsidiaries, primarily in Canada . We did not repatriate foreign cash to
the U.S. during 2022.
Material Cash Requirements
The following table summarizes our material cash requirements by fiscal year at
April 30, 2022 .
2028 and
Total 2023 2024-2025 2026-2027 beyond
Long-term debt obligations, including
current portion (A) $ 4,350.0 $ - $ 1,000.0 $ - $ 3,350.0
Interest payments (B) 1,982.8 147.2 294.3 224.3 1,317.0
Purchase obligations (C) 2,787.6 2,309.4 297.3 119.7 61.2
Total $ 9,120.4 $ 2,456.6 $ 1,591.6 $ 344.0 $ 4,728.2 (A)Long-term debt obligations, including current portion, excludes the impact of offering discounts, make-whole payments, and debt issuance costs.
(B)Interest payments consists of the interest payments for our fixed-rate Senior Notes.
(C)Purchase obligations includes agreements that are enforceable and legally
bind us to purchase goods or services, which primarily consist of obligations
related to normal, ongoing purchase obligations in which we have guaranteed
payment to ensure availability of
35
--------------------------------------------------------------------------------
raw materials. We expect to receive consideration for these purchase obligations
in the form of materials and services. These purchase obligations do not
represent all future purchases expected but represent only those items for which
we are contractually obligated. Amounts included in the table above represent
our current best estimate of payments due. Actual cash payments may vary due to
the variable pricing components of certain purchase obligations.
Our other cash requirements at April 30, 2022 , primarily included operating and
finance lease obligations, which consist of the minimum rental commitments under
non-cancelable operating and finance leases. As of April 30, 2022 , we had total
undiscounted minimum lease payments of $121.4 and $4.0 related to our operating
and finance leases, respectively. For additional information, see Note 11:
Leases.
In addition, we have other liabilities which consisted primarily of projected
commitments associated with our defined benefit pension and other postretirement
benefit plans, as disclosed in Note 8: Pensions and Other Postretirement
Benefits, including expected contributions of $80.0 in 2023 to our qualified
defined benefit pension plans. The total liability for our unrecognized tax
benefits and tax-related net interest at April 30, 2022 , was $7.4 under
Financial Accounting Standards Board ("FASB") Accounting Standards Codification
("ASC") 740, Income Taxes; however, we are unable to reasonably estimate the
timing of cash settlements with the respective taxing authorities. For
additional information, see Note 13: Income Taxes.
As of April 30, 2022 , we do not have material off-balance sheet arrangements,
financings, or other relationships with unconsolidated entities or other
persons, also known as variable interest entities. Transactions with related
parties are in the ordinary course of business and are not material to our
results of operations, financial condition, or cash flows.
NON-GAAP FINANCIAL MEASURES
We use non-GAAP financial measures including: net sales excluding divestitures
and foreign currency exchange, adjusted gross profit, adjusted operating income,
adjusted income, adjusted earnings per share, earnings before interest, taxes,
depreciation, amortization, and impairment charges related to intangible assets
("EBITDA (as adjusted)"), and free cash flow, as key measures for purposes of
evaluating performance internally. We believe that investors' understanding of
our performance is enhanced by disclosing these performance measures.
Furthermore, these non-GAAP financial measures are used by management in
preparation of the annual budget and for the monthly analyses of our operating
results. The Board also utilizes certain non-GAAP financial measures as
components for measuring performance for incentive compensation purposes.
Non-GAAP financial measures exclude certain items affecting comparability that
can significantly affect the year-over-year assessment of operating results,
which include amortization expense and impairment charges related to intangible
assets, special project costs, gains and losses on divestitures, the change in
net cumulative unallocated derivative gains and losses, and other one-time items
that do not directly reflect ongoing operating results. Income taxes, as
adjusted is calculated using an adjusted effective income tax rate that is
applied to adjusted income before income taxes and reflects the exclusion of the
previously discussed items, as well as any adjustments for one-time tax related
activities, when they occur. While this adjusted effective income tax rate does
not generally differ materially from our GAAP effective income tax rate, certain
exclusions from non-GAAP results, such as the one-time deferred state tax impact
of the internal legal entity simplification during 2022, can significantly
impact our adjusted effective income tax rate.
These non-GAAP financial measures are not intended to replace the presentation
of financial results in accordance with U.S. GAAP. Rather, the presentation of
these non-GAAP financial measures supplements other metrics we use to internally
evaluate our businesses and facilitate the comparison of past and present
operations and liquidity. These non-GAAP financial measures may not be
comparable to similar measures used by other companies and may exclude certain
nondiscretionary expenses and cash payments.
36
--------------------------------------------------------------------------------The following table reconciles certain non-GAAP financial measures to the comparable GAAP financial measure. See page 28 for a reconciliation of net sales adjusted for certain noncomparable items to the comparable GAAP financial measure.
Year Ended
2022 2021
Gross profit reconciliation:
Gross profit $ 2,700.7 $ 3,138.7
Change in net cumulative unallocated derivative gains and losses 23.4 (93.6)
Cost of products sold - special project costs (A) 20.5 3.4
Adjusted gross profit $ 2,744.6 $ 3,048.5
% of net sales 34.3 % 38.1 %
Operating income reconciliation:
Operating income $ 1,023.8 $ 1,386.8
Amortization 223.6 233.0
Other intangible assets impairment charges 150.4 3.8
Gain on divestitures - net (9.6) (25.3)
Change in net cumulative unallocated derivative gains and losses 23.4 (93.6)
Cost of products sold - special project costs (A) 20.5 3.4
Other special project costs (A) 8.0 20.7
Adjusted operating income $ 1,440.1 $ 1,528.8
% of net sales 18.0 % 19.1 %
Net income reconciliation:
Net income $ 631.7 $ 876.3
Income tax expense 212.1 295.6
Amortization 223.6 233.0
Other intangible assets impairment charges 150.4 3.8
Gain on divestitures - net (9.6) (25.3)
Change in net cumulative unallocated derivative gains and losses 23.4 (93.6)
Cost of products sold - special project costs (A) 20.5 3.4
Other special project costs (A) 8.0 20.7
Other one-time items:
Pension plan termination settlement charges (B) - 29.6
Adjusted income before income taxes $ 1,260.1 $ 1,343.5
Income taxes, as adjusted 297.9 318.5
Adjusted income $ 962.2 $ 1,025.0
Weighted-average shares - assuming dilution 108.4 112.4
Adjusted earnings per share - assuming dilution $ 8.88 $ 9.12
EBITDA (as adjusted) reconciliation:
Net income $ 631.7 $ 876.3
Income tax expense 212.1 295.6
Interest expense - net 160.9 177.1
Depreciation 235.5 219.5
Amortization 223.6 233.0
Other intangible assets impairment charges 150.4 3.8
EBITDA (as adjusted) $ 1,614.2 $ 1,805.3
Free cash flow reconciliation:
Net cash provided by (used for) operating activities $ 1,136.3 $ 1,565.0
Additions to property, plant, and equipment (417.5) (306.7)
Free cash flow $ 718.8 $ 1,258.3 (A) Special project costs include certain divestiture, acquisition, integration, and restructuring costs, which are recognized in cost of products sold and other special project costs. For more information, see Note 2: Integration and Restructuring Costs and Note 4: Reportable Segments.
(B) Represents the nonrecurring pre-tax settlement charges of$29.6 related to the purchase of an irrevocable group annuity contract to transfer our Canadian defined benefit pension plan obligation to an insurance company (the "Canadian buy-out contract"). For additional information, see Note 8: Pensions and Other Postretirement Benefits. 37 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES AND POLICIES
The preparation of financial statements in conformity withU.S. GAAP requires that we make estimates and assumptions that in certain circumstances affect amounts reported in the accompanying consolidated financial statements. In preparing these financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. We do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Trade Marketing and Merchandising Programs: In order to support our products, various promotional activities are conducted through retailers, distributors, or directly with consumers, including in-store display and product placement programs, price discounts, coupons, and other similar activities. The costs of these programs are classified as a reduction of sales. We regularly review and revise, when we deem necessary, estimates of costs for these promotional programs based on estimates of what will be redeemed by retailers, distributors, or consumers. These estimates are made using various techniques, including historical data on performance of similar promotional programs. Differences between estimated expenditures and actual performance are recognized as a change in estimate in a subsequent period. During 2022, 2021, and 2020, subsequent period adjustments were less than 3 percent of both consolidated pre-tax income and cash provided by operating activities. Income Taxes: We account for income taxes using the liability method. In the ordinary course of business, we are exposed to uncertainties related to tax filing positions and periodically assess the technical merits of these tax positions for all tax years that remain subject to examination, based upon the latest information available. We recognize a tax benefit when it is more likely than not the position will be sustained upon examination, based on its technical merits. The tax position is then measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and may record a valuation allowance if, based on all available evidence, we determine that it is more likely than not that all or some portion of such assets will not be realized. Valuation allowances related to deferred tax assets can be affected by changes in tax laws, statutory tax rates, and projected future taxable income levels. Changes in estimated realization of deferred tax assets would result in an adjustment to income in the period in which that determination is made, unless such changes are determined to be an adjustment to goodwill within the allowable measurement period under the acquisition method of accounting. The future tax benefit arising from the net deductible temporary differences and tax carryforwards was$193.4 and$229.6 atApril 30, 2022 and 2021, respectively. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and results of operations. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance has been provided. As ofApril 30, 2022 , a portion of our undistributed foreign earnings, primarily inCanada , is not considered permanently reinvested, and an immaterial deferred tax liability has been recognized accordingly. Further, we have not repatriated foreign cash to theU.S during 2022.Goodwill and Other Indefinite-Lived Intangible Assets: A significant portion of our assets is composed of goodwill and other intangible assets, the majority of which are not amortized but are reviewed for impairment at least annually onFebruary 1 , and more often if indicators of impairment exist. AtApril 30, 2022 , the carrying value of goodwill and other intangible assets totaled$11.7 billion , compared to total assets of$16.1 billion and total shareholders' equity of$8.1 billion . If the carrying value of these assets exceeds the current estimated fair value, the asset is considered impaired, and this would result in a noncash impairment charge to earnings. Any such impairment charge would reduce earnings and could be material. Events and conditions that could result in impairment include a sustained drop in the market price of our common shares, increased competition or loss of market share, obsolescence, product claims that result in a significant loss of sales or profitability over the product life, deterioration in macroeconomic conditions, or declining financial performance in comparison to projected results.
To test for goodwill impairment, we estimate the fair value of each of our reporting units using both a discounted cash flow valuation technique and a market-based approach. The impairment test incorporates estimates of future cash flows; allocations of certain assets, liabilities, and cash flows among reporting units; future growth rates; terminal value amounts;
38
--------------------------------------------------------------------------------
and the applicable weighted-average cost of capital used to discount those
estimated cash flows. The estimates and projections used in the calculation of
fair value are consistent with our current and long-range plans, including
anticipated changes in market conditions, industry trends, growth rates, and
planned capital expenditures. Changes in forecasted operations and other
estimates and assumptions could impact the assessment of impairment in the
future.
At April 30, 2022 , goodwill totaled $6.0 billion . Goodwill is substantially
concentrated within the U.S. Retail Pet Foods , U.S. Retail Coffee, and U.S.
Retail Consumer Foods segments. During 2022, no goodwill impairment was
recognized as a result of the evaluations performed throughout the year. The
estimated fair value of each of our reporting units for which there is a
goodwill balance was substantially in excess of its carrying value as of the
annual test date, with the exception of the Pet Foods reporting unit, for which
its fair value exceeded its carrying value by approximately 6 percent. A
sensitivity analysis was performed for the Pet Foods reporting unit, assuming a
hypothetical 50-basis-point decrease in the expected long-term growth rate or a
hypothetical 50-basis-point increase in the weighted-average cost of capital,
and both scenarios independently yielded an estimated fair value for the Pet
Foods reporting unit below carrying value.
Other indefinite-lived intangible assets, consisting entirely of trademarks, are
also tested for impairment at least annually and more often if events or changes
in circumstances indicate their carrying values may be below their fair values.
To test these assets for impairment, we estimate the fair value of each asset
based on a discounted cash flow model using various inputs, including projected
revenues, an assumed royalty rate, and a discount rate. Changes in these
estimates and assumptions could impact the assessment of impairment in the
future.
At April 30, 2022 , other indefinite-lived intangible assets totaled $2.6
billion . Trademarks that represent our leading brands comprise approximately 90
percent of the total carrying value of other indefinite-lived intangible assets.
As of April 30, 2022 , the estimated fair value was substantially in excess of
the carrying value for the majority of these leading brand trademarks, and in
all instances, the estimated fair value exceeded the carrying value by greater
than 10 percent. During 2022, we recognized an impairment charge of $150.4
related to the Rachael Ray Nutrish brand within the U.S. Retail Pet Foods
segment, representing the extent to which the carrying value exceeded the
estimated fair value. We reassessed the long-term strategic expectations for the
Rachael Ray Nutrish brand and reclassified this brand as a finite-lived
intangible asset on January 31, 2022 .
The carrying value of the goodwill within the U.S. Retail Pet Foods segment was
$2.4 billion as of April 30, 2022 , and remains susceptible to future impairment
charges due to narrow differences between fair value and carrying value, which
is primarily attributable to the recognition of these assets at fair value
resulting from impairment charges in recent years. Any significant adverse
change in our near- or long-term projections or macroeconomic conditions could
result in future impairment charges which could be material. For additional
information, see Note 6: Goodwill and Other Intangible Assets.
Furthermore, we continue to evaluate the potential impact of COVID-19 on the
fair value of our goodwill and indefinite-lived intangible assets. While we
concluded there were no indicators of impairment as of April 30, 2022 , any
significant sustained adverse change in consumer purchasing behaviors,
government restrictions, financial results, or macroeconomic conditions could
result in future impairment.
Pension and Other Postretirement Benefit Plans: To determine the ultimate
obligation under our defined benefit pension and other postretirement benefit
plans, we must estimate the future cost of benefits and attribute that cost to
the time period during which each covered employee works. Various actuarial
assumptions must be made in order to predict and measure costs and obligations
many years prior to the settlement date, the most significant being the interest
rates used to discount the obligations of the plans, the long-term rates of
return on the plans' assets, and mortality assumptions. We, along with
third-party actuaries and investment managers, review all of these assumptions
on an ongoing basis to ensure that the most reasonable information available is
being considered.
We utilize a spot rate methodology for the estimation of service and interest
cost for our plans by applying specific spot rates along the yield curve to the
relevant projected cash flows to provide a better estimate of service and
interest costs. For 2023 expense recognition, we will use weighted-average
discount rates for the U.S. defined benefit pension plans of 4.59 percent to
determine benefit obligation, 4.77 percent to determine service cost, and 4.26
percent to determine interest cost. For the Canadian defined benefit pension
plans, we will use weighted-average discount rates of 2.41 percent to determine
benefit obligation and 2.33 percent to determine interest cost. As of April 30,
2022 , a 50 basis-point decrease in the discount rate assumption would increase
the 2023 net periodic benefit cost by approximately $0.2 , and the benefit
obligation would increase by approximately $22.2 . In addition, we anticipate
using an expected rate of return on plan assets of 4.51 percent and 1.60 percent
for the U.S. and Canadian defined benefit pension plans, respectively. A 50
basis-point decrease in the expected
39
--------------------------------------------------------------------------------
rate of return on plan assets assumption would increase the 2023 net periodic
benefit cost by approximately $1.8 . A change in the assumptions used for the
Canadian defined benefit pension plans would not have a material impact on the
net periodic benefit cost and benefit obligation.
FORWARD-LOOKING STATEMENTS
Certain statements included in this Annual Report on Form 10-K contain forward-looking statements within the meaning of federal securities laws. The forward-looking statements may include statements concerning our current expectations, estimates, assumptions, and beliefs concerning future events, conditions, plans, and strategies that are not historical fact. Any statement that is not historical in nature is a forward-looking statement and may be identified by the use of words and phrases such as "expect," "anticipate," "believe," "intend," "will," "plan," and similar phrases. Federal securities laws provide a safe harbor for forward-looking statements to encourage companies to provide prospective information. We are providing this cautionary statement in connection with the safe harbor provisions. Readers are cautioned not to place undue reliance on any forward-looking statements, as such statements are by nature subject to risks, uncertainties, and other factors, many of which are outside of our control and could cause actual results to differ materially from such statements and from our historical results and experience. These risks and uncertainties include, but are not limited to, those set forth under the caption "Risk Factors" of this Annual Report on Form 10-K, as well as the following:
•the impact of the COVID-19 pandemic on our business, industry, suppliers, customers, consumers, employees, and communities;
•disruptions or inefficiencies in our operations or supply chain, including any impact caused by product recalls (including the recent Jif peanut butter recall), political instability, terrorism, armed hostilities (including the recent conflict betweenRussia andUkraine ), extreme weather conditions, natural disasters, pandemics (including the COVID-19 pandemic), or other calamities;
•risks related to the availability of, and cost inflation in, supply chain inputs, including labor, raw materials, commodities, packaging, and transportation;
•the impact of food security concerns involving either our products or our competitors' products, including product recalls;
•risks associated with derivative and purchasing strategies we employ to manage commodity pricing and interest rate risks;
•the availability of reliable transportation on acceptable terms, including any impact of the COVID-19 pandemic;
•our ability to achieve cost savings related to our restructuring and cost management programs in the amounts and within the time frames currently anticipated;
•our ability to generate sufficient cash flow to continue operating under our capital deployment model, including capital expenditures, debt repayment, dividend payments, and share repurchases;
•our ability to implement and realize the full benefit of price changes, and the impact of the timing of the price changes to profits and cash flow in a particular period;
•the success and cost of marketing and sales programs and strategies intended to promote growth in our businesses, including product innovation;
•general competitive activity in the market, including competitors' pricing practices and promotional spending levels;
•our ability to attract and retain key talent;
•the concentration of certain of our businesses with key customers and suppliers, including single-source suppliers of certain key raw materials and finished goods, and our ability to manage and maintain key relationships;
•impairments in the carrying value of goodwill, other intangible assets, or other long-lived assets or changes in the useful lives of other intangible assets or other long-lived assets;
•the impact of new or changes to existing governmental laws and regulations and their application;
•the outcome of tax examinations, changes in tax laws, and other tax matters;
•a disruption, failure, or security breach of our or our suppliers' information technology systems, including ransomware attacks;
•foreign currency exchange rate and interest rate fluctuations; and
•risks related to other factors described under "Risk Factors" in other reports
and statements we have filed with the
40--------------------------------------------------------------------------------
Readers are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this Annual Report on Form 10-K. We do not undertake any obligation to update or revise these forward-looking statements to reflect new events or circumstances subsequent to the filing of this Annual Report on Form 10-K.
© Edgar Online, source
